Portfolio diversification is generally considered a good risk management strategy as it helps spread investments across different asset classes, industries, and geographic regions to reduce the overall risk of the portfolio. By diversifying investments, an investor can reduce the impact of any one investment's poor performance on the overall portfolio.
However, over-diversification can occur when a portfolio has too many holdings and becomes inefficient. This can result in higher transaction costs, dilution of returns, and difficulty in monitoring the portfolio effectively. In such cases, the benefits of diversification may be outweighed by the costs.
Warning signs of over-diversification include high transaction costs, a lack of focus or coherent investment strategy, and a portfolio that is too complex to manage effectively. It is important to strike a balance between diversification and concentration, considering factors such as the investor's risk tolerance, investment goals, and time horizon. An experienced financial advisor can help determine the appropriate level of diversification for an individual's portfolio.
